UBS launches first tradable index tracking greenhouse effect

UBS Investment Bank has launched the UBS Greenhouse Index (UBS-GHI), the first integrated index to blend the weather and emissions asset classes. The index offers investors exposure to greenhouse gas emissions and their consequent impact on the weather, known as the greenhouse effect.

"There is a clear link between the rise in carbon levels and the rise in temperature, as scientists have been demonstrating for many years," says Ilija Murisic, executive director of hybrid derivatives trading at UBS. However, the combination of weather and emissions is a first in the structured products market. "The financial community has not yet used this connection between carbon and weather. It was something that clients were eager to do, so we have made this simple product."

The weather component of the index is derived from heating degree day and cooling degree day monthly futures contracts, both of which are traded on the Chicago Mercantile Exchange. The emissions component is provided by carbon credits associated with the EU emissions trading scheme, which are traded on the European Climate Exchange, and the Kyoto clean development mechanism, which is traded on Nord Pool, the world's only multinational exchange for trading electric power.

The index has three sub-indexes that track the performance of a weighted average of EU allowances and certified emissions reductions futures. The composition and weighting of the index and its sub-indexes will be determined by the UBS-GHI governance committee at annual meetings.

"If people are doing more business, more energy is generated and therefore more carbon emissions are produced. If this goes above the allocated carbon emissions cap, they have to buy carbon credits. There will be more carbon in the atmosphere and the temperature will tend to rise," explains Murisic.

However, Murisic says that "despite the explosive growth of their market, weather derivatives and carbon emission futures remain predominantly a hedging instrument for professionals and, because of the complexities of the weather markets and regulation intricacies of the Kyoto Protocol, are largely inaccessible to the broad investor community." UBS wants to ease investor access to the weather and emissions markets. "We seek to have an integrated approach, combining the causes of global warming, which is carbon, with the consequences. This index provides diversification without the burden of unnecessary intricacies that cloud the whole process," says Murisic.